The rise of passive index funds is leading to a marked concentration of corporate ownership in the hands of the Big Three. In recent years they acquired significant shareholdings in thousands of publicly listed corporations both in the United States and internationally. Crucially, this large and growing industry is dominated by just three asset management firms: BlackRock, Vanguard, and State Street. Footnote 3 As of year-end 2015, passive index funds managed total assets invested in equities of more than U.S. $1 trillion-a historically unprecedented swing in investment behavior. $800 billion, while at the same time buying passively managed funds to the tune of approximately U.S. Footnote 2 Between 20 investors sold holdings of actively managed equity mutual funds worth roughly U.S. Hence, we are dividing asset management into two categories-actively and passively managed funds. Footnote 1 In contrast, active funds employ fund managers who strive to buy stocks that will outperform, which leads to higher expense ratios. ETFs and index mutual funds are technically different, but they share the fundamental feature that both seek to replicate existing stock indices while minimizing expense ratios. Since the outbreak of the global financial crisis, private as well as institutional investors have massively shifted capital from expensive, actively managed mutual funds to cheap, index mutual funds and exchange traded funds (ETFs), which we subsume under the term passive index funds. We discuss how this development entails new forms of financial risk. Moreover, the Big Three may exert “hidden power” through two channels: First, via private engagements with management of invested companies and second, because company executives could be prone to internalizing the objectives of the Big Three. However, they generally vote with management, except at director (re-)elections. Through an analysis of proxy vote records we find that the Big Three do utilize coordinated voting strategies and hence follow a centralized corporate governance strategy. Some argue passive investors have little shareholder power because they cannot “exit,” while others point out this gives them stronger incentives to actively influence corporations. This has led to opposing views on incentives and possibilities to actively exert shareholder power. In contrast to active funds, the Big Three hold relatively illiquid and permanent ownership positions. The passive index fund industry is dominated by BlackRock, Vanguard, and State Street, which we call the “Big Three.” We comprehensively map the ownership of the Big Three in the United States and find that together they constitute the largest shareholder in 88 percent of the S&P 500 firms. Since 2008, a massive shift has occurred from active toward passive investment strategies.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |